Think of the pool of foreclosed and defaults as a bath tub full of water.
The slow trickle out of the bath tub are the foreclosed homes available for sale. The number for sale is a small number compared to the amount which will go bad.
Now imagine pulling the plug out of the bathtub. Banks (if rational) are limiting what they take to the market b/c too much supply will drive down the value of the home and loans left in the bath tub. You limit supply in order to match existing demand.
